Paddington Masamha: The paradox of Zimbabwe is open for business – Part 2

The previous article focused on heralding the misalignment between the ‘Zimbabwe is Open for Business’ pitch against the widely used international proxies for gauging national market openness.

Paddington Masamha

Using statistical evidence from Zimbabwean international ratings with regards to ease of doing business, economic freedom, human rights, corruption and international competitiveness benchmarks; Zimbabwe cannot be categorized as a nation open for business.

The writer however strongly applauds the general change in the international tone and efforts for international re-engagement.

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Over and above the micro-level business challenges, Zimbabwean existing and potential entrepreneurs or businesses are saddled with additional grave and generic economic governance issues that deserves a strong mention. The following are the main limiting factors that make Zimbabwe to be less considered as an open environment for business;

The Command Systems and State Militarization

A government which pitches itself on the international platform as a liberal regime whilst overlooking the command elements inherent within its local governance systems is treated with suspicion with foreign investors. Regardless, of having public relations strategies that preach free market elements, the economy has largely been anchored on command structures.

The commonly talked about government program is the command agriculture. Having started off with crop products, the project is being extended to livestock production and the proposals for command housing project.

In its latest fashion, Zimbabwe will soon be having command transport systems. Within the fiscal and monetary system; exchange control regulations, foreign currency allocation committees and controls on prices are common features of the prevalence of command economic management systems.

By their very nature, command systems are restrictive and usually a signal of authoritarian leadership. This position is further worsened by the command system disadvantages of bureaucracy and a perpetuation of state inefficiencies.

As a complementary problem, the serious involvement of the military within the command agriculture projects further sinks the system into a rigid, ‘l know best you have to follow’ and ‘do as l say’ economy.

By and large, command systems largely suffer from the consequences of the doctor-patient binary. This largely manifests itself where the doctor (government) commands the patient (businesses and households), without due regard to patient peculiarities.

The prescription of wrong and or delayed dosages thus becomes commonplace. Therefore, singing the open for business mantra whilst maintaining command systems as the core of government operations is absolutely a negative signal to potential investors. In this free market world, command systems repel potential investors.

For illustration purposes, if one identifies the recent fuel protests as an empirical case to argue the case, the use of both command and military force is evident. The fuel industry has always been run on the basis of price control schemes and hence it is not a new argument to regard it as command managed.

It is plain to notice that the markets economic freedom of choice is in the hands of government. Therefore, whenever a government intervenes in a market through setting up price controls, price conditionality and tax covenants; the indirect signal they are giving the market is that business in Zimbabwe is run basing on the fiscal, economic and monetary commandments of the state and not the free forces of demand and supply.

Instead of engaging in open dialogue with the citizenry, the leadership uses unscrupulous command and war tactics to quench the public protests. The Zimbabwean army and police brutality was circulated on various social media platforms and a variety of international news platforms. In response, the government’s propaganda machine blocked the Zimbabwean internet.

The advent of social media in Zimbabwe has revolutionized the communication system. As such, in an attempt to satiate the ubiquitous nature of social media platforms, the governing authorities the unorthodox use of ‘directives’. Sadly, however this was achieved at the expense of violating the Constitutional rights of Zimbabweans. It only took a court procedure for government to restore the social media platforms.

Openly, the communication is evidence of having an unambiguous government command and militant directives to padlock internet services.

Awkwardly, the same internet which helped the November 2017 military assisted transition to dislodge Mugabe from power is now being used as an instrument to weaken the public constitutional rights to demonstrate and protest against uncharitable government policies.

Surely, no serious investor will make any financial indulgence with a government which dehumanizes its own people. The internet and social media obstructions is evidence enough of public economic freedom repression.

Excessive regulations and regulatory inconsistencies

In Zimbabwe, the common trend has been excessive and inconsistent application of regulations. The frequency of policy promulgation and the ultimate implementation has generally been abrupt without due regard to following rigorous policy scrutiny and gauging its potential ramifications on both local and foreign investors.

For instance; the taxation, currency and trading regulations have been haphazardly applied on corporates and individuals. The currency regulations have been a bone of contention. Under normal circumstances, the legal tender laws should not discriminate on any currency within the multi-currency basket. However, the 2018 declaration by fiscal authorities requesting payment of taxes in the transacting currencies is one such policy irregularity.

The country’s fiscal and financial system are not congruent. Whilst, the 1:1 parity condition is still being upheld by government; the ZIMRA demand of taxation in the trading currency is such a questionable tax regulation. Another interesting case is that of the fuel industry where fuel price distortions of having a bond note (RTGS, transfer and mobile money) and US dollar prices.

Additionally, government has been giving very short notices to businesses to implement proposed reforms. For instance, within the banking sector; given the separation between Nostro and RTGs accounts, banks have failed to purchase new point of sale machines which demarcate the two currencies. The recent new fuel price structure announced by the President, was announced at night and was taking effect starting the midnight from the date of announcement.

The evidence presented reveal massive forms of excessive regulatory commands and gross inconsistencies from the central government portfolios. The over-night policy changes are surely a disproportionate exercise of power, miscalculated and ill-timed regulatory commands. Potential investors, desire host countries which have moderate, clear and consistent regulatory policies. The propensity to change regulations instantaneously is a negative motion for foreign investments.

Macroeconomic risk, political risk and state of domestic investments

Politics aside, the economy is in a crisis. The Zimbabwean economic dashboard is currently laden with red signals. The unpalatable factors that Zimbabwean businesses continue to grapple with include; the currency crisis, shortages of foreign currency and resorting to shadow markets as a source of foreign currency supply, high levels of de-industrialisation and unemployment, corruption and crony capitalism, government crowding-out effect, general policy inconsistency and a lack of policy clarity among other business constraints.

The Zimbabwean macro-economic risk is further exacerbated by the political risk which is embedded largely in the command nature of the nation’s economic governance system. For instance, whenever businesses attempt to engage in price adjustments (obviously to cushion themselves against the bond note value destruction); the state reaction to such actions is threatening the going concern of such business entities.

The usual government public address is to threaten local businesses with the probable withdrawal of operating licenses and government taking regulatory measures which protect state interests. Such government threats is usually achieved through regulatory controls, but at the expense of the profit maximizing objectives of entrepreneurs.

Many a times, businesses end up being labelled economic saboteurs and regime change agents meant to reverse the gains of Zimbabwean political independence and economic sovereignty. Government controls by their very nature, they distort markets. The potential benefits of free market competition is then sacrificed hence making the economy a closed rather than an open system.

Political polarisation, poor human rights records and lack of rule of law

Zimbabwean political polarization is aligned to the command economic system, extent of state militarization and the poor regulatory environment. Historically, it is the politically unhygienic elements that have brought a poor international record for human rights abuse and the lack of rule of law. However, since most of these historical poor records are largely inherited from the former President’s 37 year rule, the analysis is concerned with the time period from the military assisted transition.

Having the desire to sanitize relations and evangelize to the outside world that the ‘old order’ of tyranny and violence is past, the current president invited international observers during the 30 July 2018 parliamentary and presidential elections.

Unfortunately, the 1 August post-election violence was a step backwards for the struggling human rights violation record. The historic constitutional court ruling and the ensuing attempt of the Commission of Inquiry has not helped solve the political impasse within the country.

As such, the current leadership is still faced with the legitimacy issues. Particularly, the international election observers have declined to endorse the historic elections by arguing that they have not been conducted in a free and fair manner.

The main opposition has also declined to accept the results. In an attempt to foster political dialogue, the ruling party has given a condition that they can only get to the negotiation table, if and only if, the opposition party endorses the elections. Therefore, the political impasse has triggered the economic turmoil.

Human rights concerns have largely emanated from the use of live ammunition on unarmed civilians. The two specific occasions where the current regime is largely implicated is the January 2019 fuel protests and the 1 August 2018 election demonstrations.

Like the predecessor; the culture of political violence and human rights abuse has again resurfaced. The difference however is the former leader did not sanction the use of live ammunition on civilians but instead used other brutal strategies to disperse crowds.

Moreover, the usual temptation of partisan and selective application of the rule of law is still present. Political patronage is at the centre stage of how regulations are applied and interpreted. Therefore, foreign investors are still suspicious of the Zimbabwean reform agenda.

Instead of the mega-deals materializing, only mega-bills (obviously through the punitive tax system) are the usual portion for the masses. It appears as though it is the people who are now open for business.

Visibly this is through the gruesome taxes and penalties for example the 2% transaction tax system, the hefty traffic fines and the recent fuel price increases triggered by the need to collect more tax on fuel. Verbally, the economy is endeavouring to open up for business, however in practice the governance structures are far from being open.

High tax regime and currency crisis

Generally, low tax regimes attract more FDI inflows than heavily taxed economies. Zimbabwe is a highly taxed regime, though the MOF now has a different view given the rebasing of the economy. Instead of the new leadership changing such a policy trajectory, their appetite for taxation keeps escalating.

In aggravation to the hefty taxes, Zimbabwe has been battling with a serious currency crisis. The surrogate bond note (and its accompanying RTGs, transfer and mobile money balances) has become the main transacting currency. Having replaced the US dollar through the commonly talked about Gresham’s Law of bad money chasing good money, the economy’s currency situation has become a major deterrent for existing and potential investors.

A stable currency determines the potential desirability of a host nation. Unstable economies such as Venezuela and Argentina are currently plagued with capital flights due to currency instabilities. Likewise, Zimbabwe is publicizing potential investment mega deals which have not yet materialized.

The limited progress and lack of commitment to embark on capital projects is hampered by the currency instabilities, given that foreign investors cannot do investment appraisals on ‘unknown’ future currency positions. The Zimbabwean monetary situation is further exacerbated by the mixed signals from the economic chauffeurs.

Major uncertainty now grips the economy given the expressions by the MOF that Zimbabwe is not going to dollarize and neither is it going the rand monetary union direction. Whilst maintaining the 1:1 parity condition and denying the apparent loss of value of the surrogate currency, the new announcement of Zimbabwe probably going to introduce a new currency has triggered a new wave of panic and currency uncertainty.

The land question

By and large, Zimbabwe is an agro-based economy. As such, any meaningful attempt to open up the economy requires a policy shift with regards to the land question. Of course, one cannot expect the government to reverse the Land Reform program, but a more organized and well-calculated land rights policy is long-overdue. The current position that land is owned by the government implies that our land is closed for foreign investors.

Over and above, the foreign investors’ consideration of how a government treats its own people and businesses; a consideration of how government corporations and parastatals are run is an additional criteria for evaluating potential investment zones.

Zimbabwean parastatals are well known for having high instances of corruption, cronyism and nepotism. The extent to which corporate governance standards and ethical principles are practiced has also been pitiable. Given these indigestible scenarios, parastatal poor performance has been inescapable.

Therefore, viewed from the lens of a potential investor; a government which fails to properly run its own public entities will likely pose operational bottlenecks to the foreign business investment. In order for the government to survive, finance its own operations and sustain public corporations’ losses; the host nation is more likely going to overtax its own locals and private business. Heavily taxed economic inhabitants entail reduced aggregate demand whilst increased tax on private firms imply a reduction in profitability.

This scenario largely summarizes the case for Zimbabwe, where government expenditures are largely financed through a hefty tax policy on the economic agents.

So one sure way to make Zimbabwe to open up for business is to first resuscitate the bedridden state parastatals for example NRZ and Air Zimbabwe which are so strategic for business. Relentless focus should also be put on promoting good corporate governance standards and reducing the endemic public sector corruption in all state parastatals.

Conclusion

It is every nation’s strategic desire to be open for business. However, for a nation to be deemed as an ‘open for business’ environment, significant policy transformations (domestic and foreign) and regulatory improvements are inevitable and obligatory.

Publicity campaigns of openness for business should be validated with tangible domestic and international commitments to improving ease of doing business ratings, macro-economic fundamentals and a political paradigm shift from repressive to democratic governance systems.

Paddington Masamha is independent Financial & Economic Analyst. You can reach him on email [email protected] or Twitter @PMasamha